Hi, Greenrookie,
I share your sentiments on this stock. Rising raw materials and labour costs have affected many companies in China and we must know how each company grapples with these problems. A major plus point for Qingmei is that the economy of scale following its capacity expansion, has helped it to overcome the setbacks. In the latest Quarter, the revenue increased by 6.6% while the nett profits grew by 18.7% over that of previous year when its production was already at maximum capacity.
As there is strong demand for its product from existing and new customers, it is reasonable to expect Qingmei to improve its performance during the 4th Quarter [Apr-Jun 2011]. EPS for 3Q11 is 11.4 cts(RMB). Assuming Qingmei EPS for 4Q11 is only 12 cts (for ease of calculation), the full year’s EPS would then be 45 cts(RMB). Dividend should amount to 13.5 cts(RMB) or 2.7 cts(S). As the conversion rate for Chinese RMB is now – One RMB for 19 cts(S$) instead of One RMB for 20 cts(S$), the dividend would be 2.56 cts(S$). At today’s price of 23 cts, the dividend yield would be 11% p.a. An investor who buys today at 23 cts or below and sells off after xd in October 2011, actually gets a dividend yield of at least 22% p.a. [based on an investment period of 6 months].
Dele – In its IPO prospectus, Qingmei had promised to pay out 30% of its nett profits as dividends for the first 2 years. The dividend paid for the first year was 11.72 cts(RMB) [30% of EPS of 39.1 cts] in November 2010. At the last AGM, the Chairman stated that the Company would review the dividends payable after the second year.
You may be interested to know that there are some margin account holders who bought into this stock at the current depressed price so as to get a “free ride for capital gains”. A 100K investment in Qingmei would give them a dividend of at least S$10,000, which is more than enough to service their loan interest payment of S$6,000 - $7,000 (for a period of 12 months).
For some considerations,
- dividend payout is a promise not a legal requirement, especially risky when it does not have a long history of paying that x% of dividends
- big assumption that 4Q will be smooth sailing
- ignores capital and statutory reserve requirements which take precedence over equity dividends. So if theres a sudden dip in earnings, like we have seen in many "nicheless" china production co, there will be no dividends
- assuming cash is there, operations are not fudgy (I do spot some red flags although not strong ones)
- assuming post dividend, firm will still operate well and price will recover the fall (remember dividend is max 20+% yield according to previous posts) so you need the firm to do this a few more times to at least get back close to your principal if price doesnt budge.
To me, thats way too many assumptions and I would rather give it a miss unless someone here writes and manages to convince. (Which I do hope for since this firm is honestly at a rather low valuation).
On a more comforting point, managment does own like 64%. However, there theres intention, it will be diluted one day and cash taken out of the company just like all the other sports company currently on SGX. I remember one of them had originally 70% owned diluted down to 30%.
I respect your viewpoint, Jinraidx. I may be wrong, but it seems to me that that you have many ready answers as to why we should not be investing in a stock like Qingmei or Eratat or many others. Perhaps you could share with us some of the stocks that conformed to many of the sound investment principles that you are adhering to?
As far as I am aware of, penny stocks especially S-chips, generally do not meet many of the good sound investment principles that textbooks often talk about. That is why they are often considered high-risk stocks when compared to the blue chips. It is for each individual to do their homework taking into account the various risks factors including those as highlighted by you, and weighing them against the possible potential rewards before making a decision – this is what I would call “taking a calculated risk”. If one is too stringent in one’s selection criteria, one may be better off focusing on good blue chips and second liners
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